The present invention relates to a method and system for providing automated trading and processing of restricted securities. In particular the present invention relates to an automated system and process to transform restricted securities processing (RSP) from being a slow and inconsistent process into an industry benchmark, and possibly a competitive advantage as a distinct and significant source of value creation for a financial institution.
Several conditions can distinguish RSP from non-RSP and are the dominant root causes for process inefficiencies: RSP requires extra “legal” process steps that culminate with a Transfer Agent's review of a Legal Opinion from Company Counsel. A Broker's Letter and Seller's Letter can be inputs wherein the primary purpose of the letters is to facilitate the generation of a Legal Opinion by Company Counsel. The Legal Opinion typically states that Company Counsel believes a trade involving restricted securities meets regulations.
Restricted securities are almost always physical documents while non-restricted securities are almost always electronic. In addition, restricted securities uniquely require legends. In present markets, physical restricted securities can be replaced by electronic positions on the books and records of the Transfer Agent with a stop order, however, this does not usually happen.
The conditions of being restricted and being physical are not one and the same, they can be separated, such as via Transfer Agent (TA) books-and-records. However, both conditions require manually intensive, inefficient, non-standard processes with poor quality control and lagging status.
In general, the prior art has shown that when a Client desires to sell restricted stock the client will call their Broker to inform them of their desire. Typically, the associated restricted stock security will already be retained by the Broker in a vault and the Broker will have some indication of a restriction applying. The Broker will typically have a pre-signed Seller's Letter with blanks for the date, rule of sale, amount to be sold and potentially other transaction specific information. The Broker and the Client, who is now a Seller, will attempt to determine an appropriate rule for sale, and whether or not the Seller meets the requirements. If they are not able to do so, the Broker and/or Seller may call the Broker's internal Restriction Desk; the Client's Counsel, or the Company Counsel to determine the appropriate rule for sale.
When the appropriate rule of sale has been ascertained, the Broker will fill in the pre-signed Seller's Letter. If the Broker does not have a pre-signed Seller's Letter on hand, they will fax the filled in Letter to the Client for signature, and the Client will then fax the signed letter back to the Broker or directly to Company Counsel. The Broker will also fill out and sign a Broker's Letter. The Broker will then determine the identity of Company Counsel in order to fax both the Seller's and Broker's Letter. The Broker will also call Company Counsel to inform them of the impending fax and give a transaction overview, and then fax the letters. Upon receipt of the faxed letters, Company Counsel will review the letters to determine if the appropriate rule has been identified and that the conditions under the rule are met. If so, Company Counsel creates and signs a Legal Opinion stating that they believe conditions for sale have been met. Company Counsel will also identify the Transfer Agent, and fax the Legal Opinion to the Transfer Agent.
In the early part of the process when the Client first calls the Broker to place the sale, the Broker will also receive from the Seller an original signed document of negotiability to forward to the Transfer Agent. If the security is on deposit in the Broker's vault, typically the Broker will have had previously given the Client a stock power which if signed by the Client, can act as documentation of negotiability. During a call to the Broker, the Broker will inform the Client to sign the stock power and physically send it, typically via an overnight service, to the Broker. If the security is in the possession of the Client or another source, the Broker will typically inform the Client to sign the security itself. The signed security can be used as the document of negotiability and forward it to the Broker. However it is accomplished, both a signed document of negotiability and the security itself must be delivered to the Transfer Agent to complete the transfer. The Broker will put events into action to ensure both items are received into the Broker's possession to be forwarded to the Transfer Agent.
Typically, the Transfer Agent will not begin the transfer process until it has received either a faxed copy or original of the signed Legal Opinion. In addition the transfer agent will require an original security along with an original signed document of negotiability.
The Transfer Agent will sort through piles of packages of negotiability documentation which typically arrive through an overnight service, and stacks of faxes of Legal Opinions to match the appropriate Legal Opinion to the appropriate security package. Alternatively, some Transfer Agents request that the Broker take receipt of the fax from Company Counsel and package this letter with the security package to eliminate the laborious task of doing this themselves. Upon completing this task, the Transfer Agent will initiate the transfer process, which includes destroying the old certificate and either reissuing a new physical security or moving the security to electronic form in a trust company environment, such as the Depository Trust Company. The only way the Broker can identify that the transfer has been complete is to go into a trust company system and search, or call the transfer agent and inquire. Overall, this process may require from one to three weeks and occasionally even longer.
What is needed is a method and system to automate Restricted Securities Processing and provide a timely, secure, platform for trading restricted securities.